FRANK- L' MS VMY | ii|li Wl s~i (o x* n •^Cotton Goods, Toofs, ^Locomotives and Hails, § Cycles, Scientific ^Apparatus, Flour, ^ Nails, furn/fure. Machinery. \U Tools, Books, , Vt'C^ Paper Good^, ^ -o %nour. Glass, i "^^ Chemicals, \^Leather ■ ^^ STATES WITH FOREIGN COUNTRIES. (■■(■ i'l^l 'll; MODERN ^'^-/'■^•/,M INDUSTRIALISM // AN OUTLINE OF THE INDUSTRIAL ORGANIZATION AS SEEN IN THE HISTORY, INDUSTRY, AND PROBLEMS OF ENGLAND, THE UNITED STATES, AND GERMANY BY FRANK L: McVEY, Ph.D. PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OK MINNESOTA ILLUSTRATED NEW YORK D. APPLETON AND COMPANY 1904 COPTRIGHT, 1904, BT D. APPLETON AND COMPANY Puhjished Octoher. 1901, THIS BOOK IS DEDICATED TO AKTHUE TWINING HADLBY, LL. D. PEESIDENT OF YALE UNIVERSITY WHOSE TEACHING AND WRITINGS HAVE BEEN A CONSTANT SOURCE OF INSPIRATION TO THE aItTHOR PEEFACE It would have been a difficult task to write the history of Modern Industrialism in a work of five or six volumes. It is a still bolder undertaking to attempt it within the pages of a single book. Believing firmly in the necessity of a clear understanding of what our complicated indus- trial society means, I have attempted neither a work of many volumes nor a compact history of modern industry, but have endeavored to show in its essentials only what that history has been in three countries, how complicated industry is in the machinery of production, exchange and distribution, and finally what problems arise from the very nature of the complicated organization with which states are forced to deal. To facilitate this treatment the book is divided into the three parts: History, Industry, and Administration. It is still further my belief that in our present indus- trial society are to be found all the essentials of the future state. If a people know what these are, to what purpose they may be utilized, how strong and how weak funda- mental principles of organization are, they may look with greater confidence to the future of the industrial state. As a people, the inhabitants of the United States are con- fronted by more serious problems than the people of Great Britain or Germany. Our very institutions, our democ- VIU PREFACE racy, free land, and great resources make them more dif- ficult of solution. The great corporation, powerful trade union, extensive railroads, and vast distributive system complicate the problems still more. The state is involved, is, in fact, compelled to take some attitude toward these problems. Shall it interfere only, or shall it regulate, control or own? These are questions which the citizen must answer in the near future. It is his to know, and if the present book brings him to a larger understanding, my purpose has been accomplished. In the writing I have resorted for material to maga- zine, periodical, newspaper, book, reports and observa- tion; in fact, to anything that would furnish facts about the changing and shifting, yet growing, industrial organ- ization. That some errors should creep into a book deal- ing with so great a subject was inevitable, but I have endeavored to guard against them by verification when- ever possible. To Professor E. A. Ross of the University of Ne- braska I am indebted for many suggestions and correc- tions. His kindness in reading the proofs has resulted in greater accuracy of statements at many points. Prom my colleagues. Professors West and Schaper, I have re- ceived occasional help and much encouragement. To Professors Appleby and Van Barnevelt of the University of Minnesota School of Mines and Mr. W. B. Chamber- lain of the Minneapolis Journal, I am under obligation for some of the photographs used in Part I, Chapter I, Part II, Chapters I, III. Frank L. McVey. University of Minnesota, August SO, 1904. CONTENTS PAET I HISTORY CHAPTER I A SURVEY PAGES The Old and New Production — Meaning of Modern Industrialism — Comparison of England, the United States, and Germany — Events in the Century — Advantage Possessed by England — Change in the Organization of Industry — Growth in Mineral Wealth, Mechanical Power, Manufacturing — The United States — Inventions — Investments and Lai'ge Organization — Possible National Specialization 3-19 CHAPTER II INDUSTRIAL CHANGES IN ENGLAND SINCE 1760 Contrast Between the Old and the New England — Causes of the In- dustrial Revolution — Periods in the Revolution — Changes Produced — The Doctrine of Laissez Paire — Agriculture — Growth of England, 1840 — Development of the Iron and Steel Industries — Legislation— The Coming of the Railroad — Suez Canal — Currency — Colonization — The Growth of Democracy — Trade Unions — A Completed Organization .... 30-41 CHAPTER III INDUSTRIAL EVOLUTION OF AMERICA Contrast with England — Evolution of Industry on a Free Land Basis — Changing and Shifting Frontiers — Domestic Industries — Delay in Manufacturing — Attitude of England — The Early Growth of the Factory System— The War of 1813— The Tariff X CONTENTS PAGES — Influences on Industrial Conditions — The Growth of the West — Internal Improvements — Conditions in the South — Social Conditions, 1860 — Rapid Progress After the Civil War — Stages in the Development of Transportation — Conflict Between the Canal and the Railroad — The Crisis of 1873 — The Railroad Conflict — Legislation — Excessive Competition and Combination — Labor Organizations — Anti-Trust Act — A Completed Na- tional Organization 42-67 CHAPTER IV THE RISE OP GERMANY Difficulties in the Way of German Unity — Population — Concentra- tion in Towns and Cities — Change in Agricultural Population — Manufacturing and Commerce — Contrast with the Germany of 1868 — Resources and the Means of Transportation — Regula- tion of the Railroad — Scientific Methods in Production — Citi- zenship and National Progress — Establishment of Commercial Schools — Relation of the Government to Industry — History of the German Empire — Influence of War on the German People — Colonial Policy — Socialist Movement — The Empire's Fu- ture 68-86 PAET II INDUSTRY CHAPTER I EXTRACTIVE INDUSTRIES Meaning of Industry — Agriculture in the United States — Advance- ment Made — English Agriculture, Its Character and Decline- German Agriculture — Methods of Cultivation — Forestration, the Value of the Product — Stages of the Industry — Forest Management — Mining, Coal, and Iron Fields in England, the United States and Germany— Changes in Mining Methods — Fisheries — The Law of Diminishing Returns — Monopoly Con- trol over Resources 89-114 CONTENTS XI CHAPTER U TRANSPORTATION PAGES Basis of Transportation in England, United States, and Germany — Principles of the Location of Cities — The Railway as the Most Important Element — Reasons and Examples of Advancement — Transportation Problems — Elevators — Canals — Deep-Sea Transportation — Control of the Means of Transportation . 115-132 CHAPTER III MANnFACTURB The National Struggle and Commercial Greatness — The Factory System Defined — Tools and Machines — Ownership of Materials — Development of the Factory — Union of Various Handicrafts — Co-operation of Artificers (of Same Handicraft) — Specializa- tion — Standardization — Interchangeable Parts — Localization of Industry — Large Production — Division of Labor — By-prod- ucts 133-156 CHAPTER IV FORMS OF INDUSTRIAL ORGANIZATION Organization of Capital and Labor — Demand for Large Amounts of Capital — Partnership — Joint-Stock Company — Corporation — The United States Steel Company — The Large Corporation — Voting Trust— The Cartel— The B. J. Smith Companies— Rail- road Organization — Promoter and Underwriter — The Labor Factor — The Trade Union — Co-operation .... 157-175 CHAPTER V COMMERCIAL INSTITUTIONS The Unity of Organization — Widening of the Market — Changes in Ownership — Facilities, New and Old — The Speculator — The Bank and the Issue of Credit — Bill Brokers — Clearing Houses — Bills of Exchange, Domestic and Foreign — Stocks and Bonds and Stock Exchanges — Disturbances in the Industrial World 176-194 Xll CONTENTS PAET III ADMINISTRATION CHAPTER I FUNDAMENTAL PROBLEMS FAGES Problems and the Outcome of National Existence — Nature of the Problem — Strength of the National Organization— Confusion of the Issue — A Domestic Problem — Foundation of Modern Society — Individualist View of the Industrial System — An Au- tomatic System— Two Fields of Activity- The Best Fitted to Survive — Competition the Outcome — Forces Against the Worst Tendencies— Equality— Efforts to Modify It by Trade Union, Co-operation, Socialism — Combination of Capital and Labor — Options Open to Society 197-315 CHAPTER II INTERFERENCE DifEerent Views Relating to State Functions — The Limits of the Problem — Definition of Terms — Laissez Faire and Interference — The Common Law — The Nature of a Contract — Competition — Restrictions Upon by Law — Freedom of Contract— Control of Corporations — Monopolies and Conspiracies — The Law a, Sufficient Remedy — The Use of the Injunction — Interference and Equality — The Individualist State and Its Meaning . 216-334 CHAPTER III REGULATION Results of Unlimited Competition — Modification of the Principle — The Necessity of State Regulation — Enumeration of the Prob- lems — Regulation in England — Attempts at Regulation in the United States— Anti-Trust Acts— Laws Based on the Common Law — Regulation ot Industry in Germany — DifEerences in the Methods Employed— Preventive and Not Prohibitive Regula- tion 335-355 CONTENTS XUl CHAPTER IV GOVERNMENT OWNERSHIP PAGES Reasons for Advocacy — Increased Social Power of the State — Ad- vantages — Government Ownership Limited — Operation of Rail- roads — Prussia — Australian States — India — New Zealand — Government Ownership of Telegraphs — Rate Making and Administration — Lack of Improvements in State Owned Rail- roads — Tests of Success — Prussian Administration — Difficulties in Australia — Advantages and Disadvantages of State Owner- ship 256-373 CHAPTER V CONCLUSION Relation of the Different Parts of the Book — Great Problems the Outcome of National Organization — Equality of Opportunity — Social Movement — Immediate Problems — Method of Dealing with Them — Attitude of States — Individualism and Socialism — Problem in America, in England, in Germany — Suffrage as a Solution — Advantages of the Present System — Necessity of Regulation 373-391 Index 293 LIST OF ILLUSTRATIONS PAGE Trade map, showing trade of United States with foreign coun- tries ......... Frontispiece The Savannah 6 The Oceanic 14 Modern newspaper printing and folding machinery . ... 18 Early English factory near Preston, Lancashire .... 25 Map showing leading products of British Isles 32 The " Rocket " 35 Industrial map of the United States 57 Industrial map of Germany 73 Logging by steam power 99 Saw mill, showing log booms 103 A modern excavating machine 106 A cyanide mill at Mercer, Utah 108 Hoisting engine Ill Landing at top of a mine shaft 113 A flour train of forty ears, showing specialization of transportation 121 A dredge used in gold mining 124 A modern elevator ... 126 One of the largest paper machines in the world . . . 141 Minneapolis milling district, an example of localization . . 149 Dynamo room of a modern electric plant 152 The Bank of England, London ... .... 185 The New York Clearing-house 189 XV PART I HISTORY CHAPTER I A SURVEY The year 1776 stands in tlie books of history as famous in achievement; in it the Declaration of Inde- pendence was written and the " Wealth of Nations " pub- lished. But it likewise marks the line between the old and the new in the system of production. With it begin the manufacture by machine, the decline of cottage in- dustry, the awakening of democracy and the dawn of Modern Industrialism". The last term designates that stage of society in which men, machines and capital are massed and marshaled to the task of creating goods. In its completed form such a society is national in type, highly specialized in skill, wonderful in resources, and powerful in inventions. Great ships, well organized railroads, banks, commercial houses and systems of credit make possible the supplementary work of transportation, and the distribution of wealth in the industrial society. To arrive at such a result is the task of years and centuries. The nation that has thrown aside the relics of a feudal time, emancipated its labor, revised its trade laws, invented machinery, organized a factory system, opened its natural resources, built railroads, constructed steam-vessels and amassed capital is within the system of modern industrialism. Production in such a nation is no longer for village and countryside, but for the mar- 3 4 MODERN INDUSTRIALISM kets of the world. The raw material that remained un- disturbed in hill and mountain is dragged in boat and train to the sea, where, in manufactured form, it is sent in giant vessels to foreign lands. With progress like this come many problems — no longer the comparatively sim- ple ones of an agricultural society, but the problems com- plicated by domestic difficulties and new world elements. The solution of these, as well as the standing and power of the completed national organization, depends upon the mutual adjustment of the several factors in production. Many elements enter a national organization, polit- ical and industrial. There must be a thoroughly amalga- mated people possessing a common language, and residing in a definite territory. Their institutions must have become well established and capable through their agency of maintaining law and order. In such a society industry and commerce reach a high degree of efficiency. The territory of the nation is covered with railroads and equipped with the modern conveniences for carrying on commerce. The political organization is well established and fully evolved, having passed the period of experi- ment. As examples of this statement England, after the Eeform Bill of 1832,* the United States since the Civil War, and Germany after the Franco-Prussian contest may be cited. Each nation since the events mentioned has pushed its industrial organization with amazing rapidity, opened its natural resources, and producing for a world's market at the same time attempts to meet the indus- trial problems that arise with the aid of the political organization. So long as one nation alone had reached the stage of a completed organization there was no great world contest, but with two or three such national societies a *The bill of 1832 was followed by the more comprehensive acts of 1867 1868, 1884-5 and 1888. The first bill was the beginning of modern demo- cratic England. A SUEVEY O conflict, national in character, was sure to take place. To-day, three nations have made the greatest advance toward the completed form — England, the United States and Germany. England entered the nineteenth century with much of the old clinging to her; her land tenure, cottage sys- tem, navigation laws, corn laws, were all relics of former conditions. These her people have bravely cast aside for freedom of trade, a factory system, and a new land tenure. On the other hand, the " Fatherland " has clung to the old and reared on a foundation hoary with age a struc- ture of modern industrialism. In this land remain an agriculture, a land tenure, and a division of labor, ancient in character; but within a limited number of industries the spirit of modern production has controlled to such a degree, that Germany stands prominently among the lead- ers of industry. The United States began her career as a modern producing nation almost without restriction. No ancient usage bound her people; in but few instances did feudal dues and old land tenures exist. Nature alone, in her heavy-handed bounty, imposed burdens. Men were free to do that which instinct, will and reason dic- tated. But this freedom brought with it intensified prob- lems of an economic and political nature. It is, then, to these three — England, the United States and Germany — that we may look for the most extended forms of mod- ern industrialism. The wonderful century in which these results were accomplished, is marked by definite stages of progress. By the opening of the century, "VVyatt had created his roller spinner, Kay his fly shuttle, Paul the carding ma- chine, Hargreave the spinning jenny, Arkwright the spin- ning frame, Crompton the mule, Cartwright the power loom, 'WlnijLeyJhe_cotton^gin, and "Watt the steam en- gine. The very foundation of a factory system was thus in the sole possession of England. The Napoleonic 6 MODERN INDUSTRIALISM wars served to strengthen England's monopoly on tJie textile machines. As these wars closed Stephenson added to her wealth of inventions another great device — the locomotive. Steam was thus used in the double capacity of driver and motive power. In 1819 the first steamship, the forerunner of mighty ocean carriers, crossed the Atlantic. By this new means of communication the English market was extended and The Savannah. British supremacy threatened. Nineteen years later Morse stretched a wire between Washington and Baltimore and sent a message over it; the half century had just begun when Cyrus Field succeeded in uniting Europe and America by a similar method. The steamship and cable had made the world smaller. Sir Henry Bessemer announced in August, 1856, in a paper before the British Association the now famous process of making steel; it required three years of costlv experiment to solve finally the problem. Soon aftCT the Suez Canal was completed and a new and shorter A SURVEY 7 route to India established, through which were to pass in endless succession the steam-vessels built of Bessemer steel. In England, America, and Germany railroads were building, hastened by the new process of steel-making. The completion of a Pacific road in 1869, again short- ened world distances. By these achievements America and other lands were enabled to bring their vast resources to ocean ports and finally to exchange them for foreign products. But before this was possible in the fullest sense of the word it was necessary for them to complete their internal organization. The political history of the century is suggestive of national movement. England had acquired India and established an orderly civil government there, France had a foothold in Asia, the United States - as in the instance of cigarette manufacture in Egypt. There a dry climate prevails which preserves the aroma of the tobacco perfectly; as a consequence tobacco is brought thousands of miles to the land of the Pharaohs. Abundance of ice in a northern region will influence the location of packing-houses; and the presence of natural deposits, as in the case of the oil industry, will determine the establishment of manufactur- ing concerns. Harbors, waterways, and transportation facilities will sometimes draw capital and labor to a prom- ising region. Often cheap labor has a similar influence in causing the investment of capital in comparatively new commercial countries. A number of instances of this state- ment have been published in the public press; in these reports it appears that the cheap labor of Mexico, Japan and China is to be utilized by capitalists to manufacture various products by the aid of extensive machinery. Per- haps a still more notable influence is the character of the 148 MODERN INDUSTRIALISM people, their technical training, perseverance and skill. Thus it is said that the high intelligence of the American workman is due to the system of public instruction, and his skill to the mechanical instincts of the people and the discipline of the shops. The concentration of industry at a specific point is due to a number of causes already enumerated as nearness to materials and market, water-power, favorable climate, a supply of labor and capital available for investment. In the days of accidental selection of location the momentum of an early choice was sometimes sufficient to centralize an industry and keep it localized until a population had grown up around the factory in such large numbers as to give a supply of labor and a market of considerable regularity. Nearness to market and material no longer means within hailing distance, but has reference to accessibility, which depends upon the transportation facilities and the char- acter of the commodity. In another place it was stated that the fisheries and shipping industries early supplied a capital for the New England factories. This is an instance of localization due in part to the possession of capital in a community which was used to build up manufacturing. There are many agricultural sections which, having prospered, are using their surplus to build up small factories in their neighborhood. And sometimes this is the only reason for the establishment of the factory in a specific place, although in New England the presence of water-power and an intelligent population utilizable as factory-workei-s were additional incentives. The localization points of industries are selected in the first instance with some advantage in mind, but the choice is nevertheless a matter of chance, for the reason that the advantage may disappear in the changing of conditions. Factories established at competitive points for the purpose of securing better freight-rates may find that with the 150 MODERN INDUSTRIALISM groAvth of other centers this advantage no longer exists. Early in the history of Minneapolis the flour-mills were erected on the banks of the Mississippi at St. Anthony Falls to make use of the water-power. For many years this was a distinct advantage, but with the increase in the number of mills and the failure of the water-supply in the Mississippi at certain times in the year the advantage in the Minneapolis flouring center is no longer based upon water-power, but upon nearness to the wheat-fields of Min- nesota and Dakota and the incentive of an early establish- ment. The proof of the advantage in the localization point of an industry is its success. Prosperity having come to the pioneer of the industry localization begins when his imita- tors follow his example and set up their factories in the same town. The very success of the first enterprise has demonstrated to his imitators that the economic conditions are favorable and a local bias toward that industry is started that draws managers, capitalists and laborers to the growing manufacturing center.* The value of an enter- prising industrial center to the captain of industry is in the presence of men, with capital seeking investment, and a body of skilled workers. In the course of time some very distinct advantages emerge from the centralization of industry at geographical points. First among these may be mentioned the mobilization of skilled laborers who are often highly specialized in their crafts. This is an ad- vantage, however, that is distinctly lessened by the extend- ed use of machinery. The second is the development of an extensive subdivision of the processes of manufacture among employees. This point has already been referred to in the early part of the chapter. Third, there is in such a community continual improvement of machinery and * Part I. Statistics of Manufacturers, Twelfth Census of the United States, has furnished many points for the discussion on Localization of Industry, MANUFACTURE 151 the adoption of new processes as soon as introduced. " As a result, new and up-to-date tools and machinery may be had in such centers with the least possible delay, and ex- isting machinery may be kept continually in repair. The town's specialization increases its supply of specialized la- bor and specialized machinery. These in turn react to in- crease the specialization of the town. Success breeds suc- cess in almost geometrical ratio. Cause and effect propel each other in a continually expanding circle, the self- created local advantages becoming in time so powerful that they entirely neutralize the greater advantages of location which other localities may have come to possess." * Specialization in the creation of separate industries leads to localization, and in time to still more extended and detailed specialization. When this point has been reached and the industry is concentrated in location and in the division of function, there still remains the concentration of ownership and management. This is a natural result likely to come out of the specialization, just referred to, and the excessive competition likely to take place between localized plants. The movement in the organization of concentration took two forms : one to obviate the difficulties of too much competition, and the other to secure the advan- tages of unified ownership and management in large produc- tion. The first became entirely a matter of organization and finance ; the second, while necessarily confronted with financial problems, was fundamentally a question of econ- omy in the use of productive agencies. The first therefore disappears from this part of the discussion while the other continues under the title of '* large scale production." Without intending to emphasize the point too strongly the distinction between production on a large scale and the combination of separate plants may again be called to the attention of the reader. The first of the terms applies to the creation of commodities with the best of machinery, * Page ccxiv of last reference. 152 MODERN INDUSTRIALISM the largest and most thoroughly organized factories, a highly equipped labor force and efficient management. The test of such production is " low cost." Combination, on the other hand, has to do with the control of a number of plants under one management. The advantages which accrue to society are those due to the elimination of some of the managers, selling agents, and to better facilities for purchasing and handling raw materials, although much doubt may be east on this statement. The tendency of the Dynamo room of a modern electric plant. latter is toward monopoly, and in the end is not likely to encourage the development of the most efficient organiza- tion. Without competition many of the economic ad- vantages secured through combination of plants may be lost. A group of five phrases includes all the advantages arising from the extensive production outside the pale of monopoly and combination. These are, economy in motive power and plant, economy in machinei-y, organization of MANUFACTURE 153 labor, utilization of by-products and special facilities in placing the product on the market. An examination of them in order of statement may throw light upon the development of production on a large scale. In the erection of a plant the old geometrical rule that space increases as the cube of the dimensions applies to the building of factories, and as a result extensive wall area increases materially the capacity of the factory. A somewhat similar rule applies to engines, for fuel cost and other expenses decline per horse-power as the central au- tomaton increases in size. There is, however, a limit to the economies resulting from the size of plants, as seen especially in the size of boilers, engines and machinery, and after the limit is reached it is necessary to equip new factories, for the economies of large scale production have virtually ceased when this point is reached. But a large concern can arrange and organize its machinery so as to receive the best possible returns from its operation. To do this requires large capital, for the growing specialization of industry is constantly adding new machines and casting out old ones. Thus a witness before the United States Industrial Commission testified that in order to build and equip a plant for the manufacture of steel and to carry on the business with the expectation of meeting all comers an investment of from $20,000,000 to $30,000,000 is required. The arrangement of the machinery in a large steel plant is described by E. Lavasseur in his book on the American Workman as follows : " The eight blast-furnaces are arranged in two rows and built upon platforms. Each furnace is provided at the back with four blowing-engines and has a capacity of from 300 to 350 tons per day. To- gether with the three converters, each able to pour 2,000 tons of steel daily into the ingot molds arranged around them, they produce an imposing idea of the power of this establishment. The rolling-mill, which is about three bun- 154 MODERN INDUSTRIALISM dred feet long, produces an impression even more thrilling, because the exhibition of power is supplemented by the crash and roar of enormous machines at work. These ma- chines take up the glowing ingots, which are longer than a man, carry them to and from the rolls, flatten them and finally draw them into sections. They are transformed into steel rails instantly, so to speak, and are then carried by tables rdoved on endless chains to the end of the room, where circular-saws cut them into regular lengths, with a strident grinding and a continuous shower of sparks. There are few workmen in this vast room. In the center a roller with three or four assistants directs the machinery by pressing a button. At the end of the room one sees a few laborers. The machines do everything and there is much to be done : the rolling alone requires three thousand horse-power. But they accomplish their work with ease, now giving the idea of might as the rolls exert their power, now that of grace as the cranes grasp and lift the ingots." In successful manufacturing it is highly essential that there shall be the same co-ordination of machinery and processes as in the example given above. Such a result is only securable through the administrative genius of an executive who requires such number and character of sub- ordinates as will fit the plan of organization. Varying grades of skill and directive power meet and touch each other in the Operation of a plant. The object is to secure related steps and processes that may be operated continu- ously and uninterruptedly in the creation of commodities. To accomplish this demands an extensive division of labor in the work both of new and of old machines ; the outcome of such specialization is the introduction in the manu- facture of specialists and specialized machinery. The purpose is to ascertain the exact number of processes that will save the most time and produce the largest output. This principle Babbage expressed in these words: WTien the number of processes into which it is most advantageous MANUFACTURE 155 to divide it is ascertained, as well as the number of indi- viduals to be employed, then all other manufacturers who do not employ a direct multiple of this number will pro- duce the article at a greater cost. The most striking phase of modern manufacturing is the utilization of former waste products. The competi- tion of manufacturers for a place in the markets of the nation and of the world is becoming keener and sharper, forcing as a consequence the closest study of the possible utilization of waste materials. In Germany and England careful attention has been given to the question of by- products, but in the United States, where nature has been lavish with her resources, little attention has been given the by-product, the whole tendency having set strongly in the direction of organization and the development of ma- chinery. The competition, however, has finally forced utilization of waste products, although the investments in old plants stand in the way of the immediate adoption of the new methods. It is stated by a writer in the Engineers' Magazine that by-product coking would mean the casting aside of thirty millions of dollars invested in the old bee- hive ovens ; even as the industry is now conducted the by- product is six millions' worth of ammonia sulphate and five million dollars' worth of tar. The ultimate result may be the shifting of coke-making from the fuel-fields to the centers of population^ where the excess gas can be used for industrial purposes. " The tendency everywhere," says a writer in the final report of the United States Industrial Commission, " is to finds ways of utilizing rejected substances or scraps of material. Out of the residuum from the refining of petro- leum a hundred valuable products are now manufactured. Cotton-seed, once chiefly wasted, is made to produce a highly useful and valuable oil. Even the utilization of tin-scraps, one of the most perplexing problems of earlier days, is now comparatively well solved. The change from 156 MODERN INDUSTRIALISM iron to steel has been from a weldable, but practically non- fusible substance, to on© whicb may be freely and fully melted into a mass, however the character of the scrap may be varied. The re-employment of old iron which can be dissolved into the new steel mixture, or of worn-out or rejected steel of all qualities by converting it into new products, is a most important economy. These illus- trations are paralleled in all departments of industry as the outcome of modern methods and inventions. Both the introduction of new products and the utilization of by- products and of wastes are direct contributions to the world's wealth." CHAPTER IV FOEMS OP INDtrSTEIAL ORGANIZATION Outside the contribution of nature to man's welfare in an industrial society capital and labor are tlie most impor- tant factors in the creation of products. Consequently the forms which the two factors take on in their organization have a vital influence upon the industrial activities of the community. The two differ materially, however, in the type of organization which they assume. Capital passes gradually from the partnership through the joint-stock company and corporation to the giant combination. Its organization form is entirely industrial in character and results. On the other hand the organization of labor out- side of all consideration of the division of labor, functions which already have been discussed in a previous chapter, is social in character, touching more or less directly through the adjustment of wages the regulation of the conditions of employment and the production of commodities. The form of organization which labor takes on appears in the local trade union, the national union, and the Federation of Labor unions, and sometimes in an effort to eliminate the evils of capitalistic control of industries in cooperation. The two groups of industrial organization are con- stantly meeting in the every-day conduct of production. The owners of capital, whether they have organized as a partnership or a corporation, are the directors of industry controlling the purchase of materials, the use of machinery, 157 158 MODEEN INDUSTRIALISM the employment of labor, and the sale of the output. The laborers in their organizations can only hope to affect the labor contract, the hours of employment, the wages paid, and the output of the individual worker with the increas- ing strength of the two factors. The tendency is to come together in a system of collective bargaining for the purpose of settling the terms of the labor contracts. The functions of a labor organization are virtually ful- filled where this has been accomplished, while the capital- istic organization has still to deal with the problems of th-e division of labor, machine production and the marketing of the product. The key to the changes in the forms of capital organiza- tion is the organization for larger production. In the earlier days of industry it was held that each man in busi- ness was personally responsible for all the debts contracted by him. " But as a concern becomes larger and larger, it grows more difficult for a number of owners individually to see how it is managed. If a hundred men unite their capital in an industry they must necessarily put the con- trol in the hands of a board of directors, and can only know by occasional reports how their business is conducted. Under these circumstances it is manifestly unjust to hold them all responsible to the extent of their whole private fortunes for mismanagement on the part of the director. . . . Under such circumstances it is quite fair to transfer a part of the responsibility for loss from the shoulders of the investor to those of the outside public. . . . Without such limit of responsibility it is practically impossible to get the necessary capital subscribed for undertakings where the investors can not exercise personal supervision." * The demand for amounts of capital, far beyond the ability of a few individuals to furnish, forced in time the establishment of the principle above enunciated. The growing numbers of those who possessed capital, but who *Hadley, Economics, p. 144. FORMS OF INDUSTRIAL ORGANIZATION 159 had no special knowledge of trade or commerce, likewise added to the demand for a limited liability system. It was only gradually, however, that principles now found in the corporation came into being. Without going into the history of these principles the contrast between the cor- poration and the early forms of organization may be illus- trated by the partnership and the joint-stock company. The first of the two was probably well developed by the time of Queen Elizabeth, in whose reign a rapid growth of commerce took place. It is defined as an agreement be- tween two or more individuals to carry on a business with a view to a profit in common. In such a union each partner is the agent of the partnership and can bind the members to any contract he may choose to make. Strenuous as the measures appear to be, the law takes it for granted that the business being under their direct superintendence the partners can avoid the dangers and pitfalls of commerce. This form of organization hardly met the requirements of large production with its burdensome unlimited liability and lack of negotiable shares. Midway between the partnership and corporation are certain forms of organization that may be regarded as mile-stones on the way to the corporate goal. Neither of them partakes of the great features of a corporation al- though distinctly an advance over the partnership form. The reference is to the limited partnership and the joint- stock company. The burden of an unlimited liability still stood in the way of large investments. " One of the earliest attempts to meet this need was by the partnership in com- menda, where a comparatively small number of persons assumed the active management and the responsibility of the enterprise, while others simply furnished capital for the sake of a share in the profits." The limited partner- ship is consequently composed of two groups of partners, one which directs the business, and whose liability does not differ from the liability of ordinary partners, and the 160 MODEKN INDUSTRIALISM other having no active control assumes only a liability equal to the capital invested. About this form of organiza- tion the state has hedged many restrictions which have prevented its general use. The joint-stock company — the name given to the form described — made its first ap- pearance as an industrial organization v^ith some of the features of the modern corporation. The capital was di- vided into negotiable shares, a step in advance of the partnership. The government of the company was vested in a board of directors elected by the shareholders. Thus the principles of shares and representative government were brought into use, but the unlimited liability of share- holders still remained and the investment of capital in industrial enterprise was correspondingly retarded. This was the situation in the earlier history of the joint-stock company, but beginning with 1822 in the United States the joint-stock company has been modified and changed by statute law to such a degree that it differs to-day but little from a corporation. It is no longer necessary to sue each individual member, or possible to force the burden of the debt on the wealthy members of the company. Under statute law the joint-stock company can sue or be sued in its own name, own property, conduct a business and be free from the unliinited liability of debt, though it is re- strained from ever incurring an obligation larger than its capitalization. What the corporation was to contribute to the industrial forms of organization, even beyond the principles of shares, limited liability and representative government, was a legal personality, immortal and intangible, separate and apart from the persons composing it. Though an arti- ficial person created by law from a group of natural persons and having a continuous existence, nevertheless its powers and liabilities are different from those of its members. The powers, however, are conferred upon the organizers of a corporation either by special legislative act or by a gen- FORMS OF INDUSTRIAL ORGANIZATION 161 eral statute. An individual then can not assume the form and powers of a corporation as a matter of right, for arti- ficial bodies are created by a sovereign povsrer as a privilege and not as a right. The relationship between the state as a sovereign power and the incorporators is set forth in an instrument called a charter, which is a contract between the state and the incorporators, the incorporators and the stockholders and the stockholders and persons dealing with the corpora- tion. Through the making and granting of the charter an organization is created that has a perpetual existence ex- cept when modified by statute. Its life^ as in the case of a partnership, does not depend upon the existence of the persons owning the capital, which is a great factor in stimulating and continuing long business contra:ctp. The charter also grants the right to sue and be sued, to purchase lands and hold them for the benefit of the incorporators and their successors, to have a common seal and to make by-laws for the better government of the corporation. Finally there was evolved an organization that made it possible for a group of individuals to act as a single person without incurring personally the financial responsi- bility of an unlimited liability concern. The new form of organization had then a representative form of govern- ment, division of capital into shares, perpetual succession and limited liability. Under the influence of these cor- porate privileges the investment of capital has advanced by leaps and bounds. To investors it has offered chances of great returns without great risks, and to men of ability a rare opportunity for the exercise of their abilities, while to the public came the advantages due to a wider industrial activity incited by the use of capital centralized from many sources. Although states and nations have provided so bounti- fully for the creation of corporations, nevertheless, ways were furnished for their possible dissolution. One gives 13 162 MODERN INDUSTRIALISM the shareholders the right to surrender the franchise, an- other provides for forfeiture by judicial decree if the cor- poration extends its activities beyond the privileges of its charter, and the third, through the power that granted the charter, may take it away by compulsory legislation al- though the law of the English-speaking States has thorough- ly established the obligation of contracts. Such an act on the part of a State over its subject corporation would fol- low only after an " ultra vires " violation of the charter. In these days the most common act of this character of which a corporation is guilty, is an illegal combination to create a monopoly. These combinations of corporations brought an immense power into the hands of the directors and aroused the antagonism of states to such a degree that hostile legislation has followed, particularly in the United States, that has forced the corporations to create new forms of organization. In the organization of in- dustry the tendency in the last quarter of the nineteenth century has been toward the elimination of excessive com- petition and the organization of individual producers into industrial groups under a centralized direction. In some instances, particularly that of railroad operation, the competition between groups grew so strong that it was necessary in order to maintain rates and an equitable division of the business to secure the consolidation of the hostile groups. In securing control of a group it was first necessary for the originators to secure the acquiescence of the former competitors, and second, in order to make the control of the product complete to bring into the plan the producers engaged in manufacturing the raw material needed by the members of the combination. A notable example of the stages in group organization is seen in the causes leading up to the creation of the United States Steel Company. By 1896 there existed in the United States a number of trusts engaged in the production of special steel products. These FORMS OF INDUSTRIAL ORGANIZATION 163 began to prepare not only for the manufacture of the finished articles they were already putting out, but also to make their own billets and pig-steel. The Carnegie Steel Company was then engaged in supplying the raw materials to the manufacturers of the finished products, and in order to protect itself was forced to announce that it woyld be compelled to produce steel tubing, tin-plate, wire and other products. The remarkable organization of the Carnegie Company gave it a great advantage in any contest it might enter, while the organizations of the indi- vidual competitors were burdened with large fixed charges and possessed no reserves. The natural wish of the promo- ters of consolidation was to avoid any contest with so for- midable a competitor as the Carnegie Company and to create a gigantic corporation capable of controlling the entire iron and steel industry. The type of large-scale industrial organization before 1890 was the trust, which gave the maximum of control with the minimum of financial responsibility. Through this form it was possible for a board of directors to issue trustee certificates to shareholders, guaranteeing to them a good dividend and permanent values, while the share- holders in return delegated the tight to vote to the trustees. In this manner it was quite possible, as was repeatedly demonstrated, to secure the control of a number of manu- facturing concerns and place them under the direction of a few individuals. But the law in the form of an anti- trust act declared this procedure illegal, and forced for one reason or another a change in the type of organization. The succeeding forms have been still more extended, resulting in centralization and very large corporations. In many respects the centralized corporation is like the original trust form, in that the companies composing it still retain their original existence and are governed through the representatives of the promoters and the boards of directors of the different concerns. This control is se- 164 MODERN INDUSTRIALISM cured by the purchase of a majority of the stock, or possibly the entire stock, of each one of the corporations. The offi- cers of the large corporations elect the boards of directors of the different plants and in this way hold complete control. Although the different corporations manage their separate affairs independently, they are guided by the information and the policy emanating from the central officers. The large corporation, however, has come to be the more com- monly existent form, for it centralizes the control in a more marked degree than the corporation referred to above. It purchases outright the stock of the corporations which are to be absorbed, by issuing the stock of the large corpora- tion or by the payment of cash. The affairs of the new corporation are governed by a board of directors in quite the usual way. The advantages are found in the centrali- zation of power and the elimination of the small corpora- tions. As a protective measure on the part of the small cor- porations against possible control or absorption by a con- solidation movement of the kind just described, the device of the voting-trust has been created. The object is to secure a continuous policy that can not be interrupted by the sale of shares held by individuals. The method fol- lowed is to place a majority of the stock in the hands of trustees who are given the right to vote it, while the share- holders retain for themselves the privilege of drawing divi- dends and making transfers. It is possible that the mi- nority shareholders may be done some injustice by a plan of this kind, but many corporations have saved their organization by this device. What in America, and in England to some extent, has taken the form of the large corporation has in Austria and Germany appeared in a modification of the pool.* Three purposes move the producers in these latter States, namely : the attainment of high prices, the regulation of the supply, * Report of United States Industrial Commission, vol. xviiL FORMS OF INDUSTRIAL ORGANIZATION 165 and a monopoly for each individual capitalist. The form which the pool will take depends upon the attainment of these objects. The common form is a written agreement which involves the regulation of price and output. To accomplish this the organization establishes a central sell- ing agency with branches, which distribute the orders and establish the prices. These combinations are usually na- tional in extent, covering the provinces and States of the Empire. The severe restrictions upon promotion and stock-watering prevent the promoter from following his calling as he is accustomed to do in the United States and England, consequently the formation of pools has come about by mutual agreement among the different producers. The propelling force has been the severe competition pre- vailing in the different industries. Although the profes- sional promoter is not a factor in the organization, never- theless some organizing agency is always an element in the organization. In most cases the banks are the promoters and their officers justify this action by calling attention to the difficulty of getting investments and the necessity of earning higher rates of interest. Often the banks are holders of large blocks of stocks and are represented on the boards of directors. In fact so far has the craze for organization gofie that banks have been established for the sole purpose of financiering some new industry. Although the large corporations in England are quite like those of America, nevertheless, there has sprung into existence there a number of combinations known as the E. J. Smith companies that differ materially from any- thing found in the United States or continental Europe. The object of these was the usual one of eliminating un- regulated competition and securing for the members a higher rate of profit. The basis of these organizations was a profit to all, individual ownership and management of the plants in the combination. The problem was : how to give each owner the control of his plant, guarantee him a 166 MODERN INDUSTRIALISM profit and still keep sufficient control of the output to ac- complish these objects. It was agreed that a certain minimum cost should be determined, and that no sales should be made below a certain percentage of the cost. By this arrangement the man who produces at the greatest cost will get a fair return upon his business. In fact every member of the combination earns a group profit, while some earn individual profits varying with their different advantages in production. The labor factor was not neg- lected in the organization for it was felt that price agree- ments could not be kept without some understanding with the workers. Consequently, an organization was formed among the working people and a contract made between the two groups. On the one side employment, good wages, and bonuses varying with profits were guaranteed, while on the other freedom from strikes, and no labor assistance to competitors were conceded. The success of the plan is indicated in the rapid organization of other industries upon a similar principle.* Perhaps in no instance has there been such rapid con- solidation of industry as in the case of the railroad systems of the United States. The forces at work in this land are such as to bring the railroad companies in the near future under a few dominating financial interests. With the late movements more than half of the railroad mileage is in the control of six of these interests. The purpose of the earlier combinations was to secure business by the extension of lines and feeders to strategic points, but to-day the ac- quirement of a railroad by consolidated interests may be for the reasons that the railroad touches strategic points, or owns terminal facilities. The object of the present marked tendency toward consolidation in railway organiza- tion is no longer economy of operation, but the avoidance of what was rapidly developing into group competition. ♦Tor more detailed account see pp. 9-23, vol. xviii, of the Report of the United States Industrial Commission. POEMS OF INDUSTRIAL ORGANIZATION 167 The control of the groups demanded ownership or direction of the railroads in an entire geographical section of the country. A study, then, of the methods employed in se- curing such control of railroad mileage should yield a number of interesting facts in industrial organization. Of these methods five may be enumerated as those adopted at one time or another in the process of railroad consolidation. They are actual purchase, consolidation by lease, holding a majority of stock or bonds, community of interests and the creation of security companies. (1) The actual purchase of a railroad may be accom- plished in three different ways ; first, by the exchange of bonds for stock, usually at an increased valuation of the stock; second, by the exchange of new bonds for the old and the retirement of the stock in the same way ; and third, the purchase by cash and the ownership in fee. There are many instances when the consolidators do not wish to burden the basic company with an increase of bonded in- debtedness, but nevertheless expect to get control of the property necessary to the completion of the plans. Further- more, State authorities may object to the actual purchase of one corporation by another. (2) Both of these objec- tions are met in consolidation by lease. Without adding to the bonded indebtedness or destroying the identity of the corporate parties to the agreement, consolidation is effected by guaranteeing a fixed return to the holders of bonds and stocks, and complete control thus secured by the guarantee- ing company. Consolidation by lease requires the consent of shareholders and the directors of a corporation, but it is possible through the purchase of stock in the open market to come into the control of a sufficient amount of it to determine the policy of a road, and to get all the benefits that accrue from a lease without the financial responsibili- ties of the latter. (3) A railroad strong in terminal facil- ities and earning power can even dominate the shareholders and consequently dictate the policy of the road with but a 168 MODERN INDUSTRIALISM minority holding. As a result of this dominance many abuses creep in, where control is possible by a bare majority or a large minority holding, that often disturbs dividends and traffic arrangements of the small independent road. Independent roads have always proved a disturbing factor in the railroad situation not always controllable by the purchase of stock or the making of a lease. (4) A novel policy has been devised to secure agreement and harmony in the field of transportation. The name given to it is " community of interest," a term used to designate the representation of one railroad upon the directorate of an- other. " This representation, intended to affect the policy of the junior company, may represent actual control or merely a minority interest as the case may be. Its objects at the same time may vary all the way from the entire elim- ination of the disturbing element of a rate-cutting road to the maintenance of a harmonious railroad policy between a number of rivals."* (5) It would appear, however, that the " community of interests " just described is but a step- ping-stone to a much larger and more extensive consolida- tion to be secured through the creation of securities com- panies. Such a company organized with a great capitaliza- tion would exchange its stock for the bonds and shares of the railroads to be acquired. The advantage over the " community of interest " plan is in the definite ownership and direction of the railroads consolidated in this way by those who are financially concerned. For the capitalization of a corporation there are two bases, one, the property owned by the corporation; the other, earning capacity. Both have their advocates. The fundamental true one must always be the assets of the company; this basis is to-day regarded as old-fashioned and in the way of modern financing. The preferred stock, however, even in overcapitalized corporations, is supposed to represent tangible assets, while the common stock is cov- * Report of United States Industrial Commission, pages 3, i, vol. rriii. FORMS OF INDUSTRIAL ORGANIZATION 169 ered by increased earning capacity, good-will, patents and trade-marks in the possession of the individual concerns who are members of the corporation. From the point of view of organizers capitalization on earning capacity is wise because it conceals the state of the business so long as there is a normal rate of return. It lessens also the danger of popular disapproval, but, per- haps more to the purpose, a capitalization always sells at a higher rate and the fluctuations are greater, affording many opportunities for speculation. In this statement lies the real reason for overcapitalization. If the blame for this condition of affairs is to be laid at any one's door it perhaps may fall with greatest justice upon the promoter and underwriter. These representa- tives of modem financiering stimulate overcapitalization by their zeal in organizing new corporations and by their methods of work. The first step made by a promoter in the creation of a new combination is to secure an option upon the plants that are to form the organization. Having done this the corporation is organized, the stock issued to owners of plants who were willing to take stock in the new enterprise, and in order to pay those who sold for cash, he finds it necessary to secure the money from some source. It is at this point the underwriter comes in. A bargain is made between the promoter and the underwriter, the latter agreeing to take so many shares of stock and to advance the money upon them. With the cash received from the underwriter the promoter pays his cash liabilities, uses part of it as a working capital, and retains part as his pay. Large inducements are held out to purchasers of shares, a bonus of common stock being given for each share of pre- ferred that is bought. The underwriter undergoes a con- siderable risk in advancing the money, for he practically agrees to buy the securities, consequently his pay is large. With the stock bonuses to shareholders, large pay to the promoter and underwriter, the modern corporation 170 MODERN INDUSTRIALISM issues from its organization period highly overcapital- ized. In the preceding pages have been traced the forms of capital organization from the partnership to the gigantic corporation. We now turn to the labor factor in industry whose organization will he presented in the remaining pages of the chapter. Without going into the history of trades-unions the reasons for their development may be presented in a sentence: the necessity of protecting the interests of the laborer in the matter of hours, wages and suitable working place by organization. The weakness of the individual workman as a bargainer in the labor market stands out in marked contrast to the corporation, company or business firm. As an organization the trade-union desires to place labor on a more equal footing with capital in the matter of bargaining. This alone is perhaps sufficient justifica- tion for the formation of the unions that now exert such a wide influence upon modern industry. The natural order of their development has been from the local union to the national, and from that to the federa- tion of all labor organizations. The local union is com- posed in two ways : one, as a society of laborers of the same craft, the other as a union of the workers engaged in a variety of trades. The first is found in the larger cities, the second in towns and villages. Hunning through the organization of labor are many lines of afiiliation and rela- tions. Thus the local union, composed as it is in large cities of the men of one craft, perhaps in a distinct part of the city, may be a member of the central union, allied trades-council and of a trades-assembly in addition to its membership in a national union and a federation of labor. The central city union has the notable ambition of organizing the laborers of a municipality in the labor move- ment. The ideal condition of such an organization is ob- tained when every laborer is a member of a local union that FORMS OF INDUSTRIAL ORGANIZATION 171 is affiliated with the central body. From each local union come delegates to the central city organization who meet in much the same way as the House of Representatives of Congress does, business is conducted by the same general rules, presented, referred to committees, reported upon and finally discussed before action is taken by the general body of the delegates. The object of this part of the trade-union movement is to organize, educate, and to defend the labor- ers. The first is accomplished by agents, the second by pamphlets, tracts, speeches and a labor press, while the third object is secured through the united labor organiza- tions by the means of money, sympathy, and the boycott. A more powerful organization still than this great body of city workers is the allied trade-councils composed of dele- gates from each union representing industries that are closely related to each other, as the crafts of the carpenter, brick-mason, lather and plasterer. The object of the alliance is frankly stated to be the making of the grievances of one craft the concern of all the others in the alliance. The weapon used in such conflicts is the sympathetic strike, although the organization of the business agents (" walking delegates ") of each union in a board of dele- gates makes possible the settlement of difiiculties with greater ease than in the case where the organization is not so complete. As a usual thing, however, the allied trade- councils send delegates to the central city union. The trades-assemblies have no such economic basis for their organization as that of the allied trades-councils. The bond which unites the members of an assembly, composed as it is of delegates of all unions, is the " unity of the work- ing classes," while the actual economic activity is limited to the boycott. Such organizations may nevertheless have a considerable political influence by using a group of voters against a specific candidate. While the allied trades- council, the central city union and the trades-assemblies are alliances and affiliations of different organized crafts in 172 MODERN INDUSTRIALISM local communities, the national unions are territorial or- ganizations of the local unions of the same trade. The mobility of labor in many trades actually compels the organization of national unions, for there is a wide-spread competition of workers with each other except in a few of the highly localized industries. In wide-spread indus- tries anything like collective bargaining can only be accom- plished by the existence of trade-unions national in extent. The national union aspires to unite all the local unions of its trade by organization, mutual insurance and support, financial and advisory, in times of strikes. In time, the national organization officers and committees will control the strike policy of a trade. This undoubtedly tends to reduce the number of such conflicts. In addition to the local and national organizations of crafts and trades there have been other attempts to bring the wage-earners of a country under a single jurisdiction. Such attempts are called federations when they take a defi- nite form. The largest and most influential of such or- ganizations is to-day in the United States based upon the principle underlying the union of the American States. " Each trade is independently organized, not, it i'S con- ceived, by virtue of any authority emanating from the whole, but by its own independent power. Each trade organization retains its sovereign control of its internal affairs, and only joins with the others in a federal organiza- tion for the consideration of common interests and the promotion of the common good."* With the wider needs of labor organizations in view the federations desire the estahlishment of collective bargaining, the use of the union label and legislation favorable to the eight-hour day, fac- tory conditions, and the restriction of the employment of women and children. The policies of trade-unions, whether organized as local societies, allied trade-councils, or national bodies, may * Report of the United States Industrial Commission, vol. xix, p. 798. FORMS OF INDUSTRIAL ORGANIZATION 173 be roughly classed into those that, first, tend to strengthen the strategic control of individual workers in dealing with their employers, and second, the ones which attempt to secure mass settlement of trades questions. Between the two classes of unions is a great difference in the general methods followed to accomplish their ends, but of some policies it may be said that trade-unions of both types accept them. Trade-unions that still believe in individually bargain- ing, as a means of settling wages, endeavor to strengthen the position of their members by limiting employment to those who are members of the union, reducing the number of apprentices, restricting the output, and conditioning the use of machinery. These smack in a large measure of medieval regulation, but the modern trade-union has large- ly given up such interference with production and now endeavors by what is called the " common rule " to advance the interests of its members. The " common rule " con- sists of the standard rate, the normal day and collective bargaining. The trade-union that follows such a policy demands the maintenance of a minimum wage and a fair day with good conditions in the shops and factories. How much more than a minimum wage shall be paid is to be determined by " collective bargaining," a system requiring for its highest development the organization of both capital and labor. The common rule, where established, is the basis of the relations existing between employer and employee. It tends to weed out the old-fashioned and stupid firms and to introduce the newer forms of business enterprise, for under it the captain of industry must have the best work- men, the best equipped factory and the most advantageous forms of industry in order to increase the output and earn dividends. As a consequence the common minimum wage automatically improves the service, introducing inventions, and better management, and leading to the collective bar- 174 MODERN INDUSTRIALISM gaining as the means of securing the most satisfactory arrangements with workers. This device may be secured through an informal agreement between local business houses and their employees, or by written agreement ex- tending through several years and in some instances in- volving workers over a wide territory. This last phase develops when the industry is national in extent and the union organized throughout the country. Many formis of conference boards ' are developed to carry out the principle when once accepted, which, when done, makes the unions and the employers partners in industry. When both are thoroughly organized and in agreement the features of the old medieval guild are produced in the control of the con- ditions of labor, the output and the sale of commodities. Certain groups of workers do not believe that the or- ganization of industry can be carried on under the present employers' system satisfactorily to the wage-earner, and they, in consequence, suggest a form in which the- entre- preneur no longer appears, but production is carried on under the direction and effort of the laborers themselves. This is called cooperation, and since it has actually taken form and in some parts of the world made rapid progress some recognition should be accorded. Where organizations have appeared under a coopera- tive principle they have taken one of three forms, some- times known as consumers, productive and credit coopera- tion. Societies of consumers are established to buy and sell commodities the profits from which are to go to the mem- bers of the associations. Such organizations have been re- markably successful creating an organized market for the products made by productive societies. The early establish- ment of scattered and somewhat unsuccessful productive cooperative societies discredited a movement that had the unusual difficulties of lack of capital, and organization, and an uncertain market to contend with. Nearly every- where the movement toward productive cooperation should FORMS OF INDUSTRIAL ORGANIZATION 175 have succeeded the consumers' societies by as many years as it preceded it. These successful establishments of co- operative stores make a certain market, while the lack of capital has been met by the changed form of the productive part of the movement in the labor copartnership plan. This recognizes the desirability of both capital and labor and provides a system under which a " substantial and known share of the profit " goes to the laborers in addition to their wages. Every laborer also has the right to invest a part of his earnings in the stock of the concern, which gives him a vote in determining the policy and officers of the plant. The system has been widely practised in Great Britain, and had in its combined societies over $7,000,000 of capital and an annual product equal to $15,000,000 at the close of the century. In the older countries, particu- larly Germany, credit-banks, cooperative in type, have been created. These have, by loaning small amounts, either on personal notes or collateral, rendered a great service in bridging over difficulties in the business of small producers. Many a debt-ridden and usured com- munity has freed itself from the toils by gathering its capital through the medium of cooperative banks. Thus far the cooperative principle has reached but a small part of the business of the world in its organization. The corporation as a stimulus to capital investment brings the organization vast sums of money and the control over industry unequaled by any other form. Successful, too, as has- been productive cooperation in its new form of labor copartnership, the trade-union still remains the dominant and prevailing factor in labor organization. These then, the corporation and trade-union, must continue to be the great forces in modern production, but cooperation may in time materially modify both the organization of capital and labor. CHAPTEK V COMMERCIAL INSTITUTIONS The industry of to-day is typified by its unity. Through it run lines to every part of the world binding the whole together in a gigantic organization. This unity is shown by the growing interdependency of trades and markets, the long processes of production involving many industries and agencies and the close dependence of them upon each other. Capital in the newer forms of produc- tion becomes more and more specialized, while the specula- tive element in the creation of goods for future markets grows increasingly greater. From the extraction of the raw material from the earth to the disposal of the finished goods to the consumer by the retailer, there is at work a minute and highly organized machine through which passes an endless chain of commodities on their way to the final user. The railroad, telegraph, telephone and steamship have accomplished the herculean task of widening the rtiarket. The contrast of the earlier days of a place, where trades- men met to exchange goods, with the world-wide groups of men dealing in the staple articles of a world's market to- day brings vividly before the mind the difference not only in the field but in the machinery of modern exchange. As of old the transfer of ownership in goods and commodities takes place between individuals, sections and nations on the basis of division of labor. To accomplish this trans- 176 COMMERCIAL INSTITUTIONS 177 fer of title with the precision, judgment and efficiency necessitated by the requirements of an enlarged produc- tion demands a highly organized system of commercial in- stitutions. The problem assumes gigantic proportions : how are the purchases of China in America to be used to pay the debts of the Yankee in England, or how is an agricul- tural community buying machinery from a manufacturing group to pay for its utensils with wheat when the manu- facturers could by no means consume so many bushels of grain ? And still in a simple, efficient way the purchases and sales of different groups and nations are set off against each other to the entire satisfaction of the producers. Not only, however, in the field of the finished com- modity market, but in the various stages of production is there a constant change of ownership from one producer to another. The lumberman buys logs from the logging com- pany, the contractor purchases his materials from the lum- ber company and so on as the article advances to its finished stage. The modern system provides for a local buyer or shipper in the region of the raw material to forward the materials to the consumption centers. Sometimes the transporting agencies act in the capacity of forwarders, especially when the raw material is a staple and salable in the world's market. At the center of consumption are the receivers of the materials in the guise of commission men, warehouse owners and wholesalers, who act as regu- lators of the supply placed in their hands from the primary sources. By degrees the materials reach the manufac- turers who produce the articles desired by the consuming public, but before the product can reach the final pur- chasers the distributor of the large and the retailers of the small must do their part of the work. The distributors consist of company factors, wholesale dealers, and middle- men. It is the purpose of this group to carry the manu- factured product well on the way to the consumer. They are dealers and forwarders of large quantities and in a 13 178 MODERN INDUSTRIALISM measure take from the manufacturer the necessity of deal- ing with the retailer. The factor sells on commission, often turning the bills and accounts he gets to the producing company for collection ; the wholesaler, on the other hand, buys direct, keeps a large stock, pays cash or short-time paper for his goods and conducts his business independently of the manufacturer. The commission man sells on orders by samples often representing no particular manufacturing company, but acting as a free-lance distributing agent. The retailer is the last distributing agent in the movement of goods, but his evolution has been the most marked of any of the commercial agents. Beginning as a peddler passing from door to door with his stock of goods he made his appearance in the days of the fair in the booth and later came to occupy a permanent location in the market-place. As population grew in density and wealth the retailer came to view as the owner of the general store, which time has evolved into the single-line business and the department store. Many modifications have taken place in the old system of product distribution. The growth in size, capital and equipment has necessitated a somewhat different system to handle the increasing product. The change has taken place in the selling departments of the trade. Thus many manu- facturing concerns have created selling departments con- trolling the product as far as the retailer, and in some instances, even placing the product in the hands of the final consumer. As a consequence the middleman is losing his importance and the old method of jobbing gradually eliminated as a system of distribution. With the develop- ment of selling departments in manufacturing plants, the retailer has gained in importance in those industries in which the manufacturer does not reach the final consumer in this organization. The movement just indicated is markedly represented in the concentration of retail trade in department stores. Possessing a large capital the COMMERCIAL INSTITUTIONS 179 owners of a department store are enabled to deal with the makers of commodities and to earn in addition to the profits of a retail concern the commissions of middlemen and the interest of the bankers. The system, moreover, has the further advantage of directly checking and directing demand. With such control over production the depart- ment store tells the producer what to make, and when, and how to deliver it. With modifications of the kind described in the paragraph it is indeed a changed system of distribu- tion that presents itself at the beginning of the twentieth century. To rest the corner-stone of the structure upon the selling agencies without taking any thought of the new function- ary, the speculator, and the extended and intricate system of credit instruments would be to lose sight of the most essential of the commercial institutions. The widened market has increased the chances of risk and possible loss in business, while the enlarged output and extended areas of sales demand instruments of exchange that will make the transfer of titles easy and efficient. The first are met by the speculator and the speculative market, the second by banks, bill brokers and exchange dealers. Losses to industry arise from the risks due to produc- tion itself and those that come from the fluctuations of the market in the prices of raw material and finished product. The ri&ks^ of production arise from the destruction of property through fire, water, and wind, the mistakes of method, miscalculation in reference to the output on the market, breakage and small product due to incompetent service, bad management, fraud and the indemnities for loss of life and limb in factory and machine production. These are borne by the individuals concerned, falling jointly upon the laborer, capitalist and entrepreneur. In a measure such losses are insurable, for they do not occur at one time neither do they fall upon a producing class, but upon members of the class. The fluctuations of the market 180 MODERN INDUSTRIALISM which have materially increased with its widened scope create continuous risks, which, unlike the hazards of pro- duction, fall upon an entire class. The group of risks con- nected with the production were spoken of as insurable, but the losses due to the fluctuations in price of raw mate- rial and finished product can not be so met. A special class of men have come into the industrial world for the purpose of assuming the risks of fluctuating prices and relieving the producing agents of the uncer- tainty of the future. The incentive which has brought the speculator to the rescue is the fact that with every risk of loss, speculatively speaking, there is a chance to gain ; for this chance the speculator is willing to assume the risk. His particular function is to localize industrial risks, re- lieve the producer and the consumer from the necessity of carrying large stocks by guaranteeing future supplies, and in some instances by cutting down the expenses of handling materials and products. For this he asks a payment of a net profit upon capital and upon the cost of business capac- ity. Whether he will receive such compensation depends upon his ability to foresee future changes in the market. " The speculator of to-day makes his money," says President Hadley in the chapter on Speculation in his book entitled Economics, " chiefly by taking advantage of differ- ences of price between different times, rather than be- tween different markets. It is not so much the difference in the price of wheat in Chicago and Liverpool which furnishes the source of his profit, as the difference between its price in Chicago from month to month. If the specula- tor foresees a rise, he buys wheat to-day with the hope of selling it at an advance. If he foresees a fall, he contracts to make future deliveries at to-day's prices, in the hope that he can secure the means of filling those contracts at rates low enough to leave him a profit. This is the type of trans- action which forms the bulk of business on all the leading exchanges of the world. COMMERCIAL INSTITUTIONS 181 " When such speculation anticipates an actual demand, it is of great service to the community. The long time which elapses between production and consumption, be- tween contracts and their fulfilment, makes it extremely important to have responsible men to anticipate the wants of the market and take the risks on their own shoulders." Continuing, President H^dley says : " If I wish to build a house, I ask a builder to give me an estimate of the cost. He in turn goes to dealers in lumber and other materials and asks them to tell at what price they will deliver him the goods when he wants them. In this way he knows approxi- mately what it will cost to build the house. The lumber dealer probably contracts to deliver lumber which is not now in bis possession. But if he understands his business he knows more accurately than any one else what its future price is likely to be. He habitually makes a profit by his superior knowledge ; but this profit is far less than the loss which would be involved if every builder, at the time of making a contract, bad to buy all the lumber he was going to want six months hence, leaving his capital (and the com- munity's capital) unproductive for that length of time, besides being subject to the dangers of loss by fire." Suggestive as is the example just cited, it does not, how- ever, give a definite impression of the vastness of the sys- tem, and how dependent the speculator's function is upon the existence of a speculative market in which stocks and commodities can be sold for cash at any time for the prices prevailing on the exchange. To sell at his pleasure, to buy when he desires, are the necessary privileges of the specula- tor. It is only when he has such a market that the specu- lator can perform his functions. It is through the sale of " futures " against raw mate- rials that the great manufacturers oifset the possible loss that may come to them as producers by the fall in the prices of their material. The system now followed protects them against the fall of price in the materials by the 182 MODERN INDUSTRIALISM speculative price received for the " futures " and against a rise by an increase in the value of the manufactured commodities. Thus it is the custom of the millers in the great flouring centers to purchase grain and store it in ele- vators receiving therefor grain receipts. Against this grain they sell through their brokers " futures " equal in amount to the grain purchased and stored in the elevators; mean- time the production of the flour from the stored grain goes on as though the " futures " did not exist. The finished product is then sold and the wheat repurchased on the speculative markets to make deliveries against the " fu- tiires " bought at the beginning of the transaction. Settle- ment is made by paying the difference between the price received and the price paid for " futures." Thus the miller has protection from fluctuation of price and a guarantee of profit on his manufacturing. He has in fact insured against market risks. The risk of possible loss is taken by the speculator who buys and sells the " futures." The speculator then performs his function by adjusting the fluctuations of prices in the same market at different times. He endeavors to equalize the supply by anticipating the needs of the market. In so far as he carries out this func- tion so far does he relieve production from the constant fluctuations of market prices and secure for it stability of profit.* Long before the speculator was recognized as a special functionary and the speculative market developed in the modern sense there was organized the machinery of ex- change by which titles of ovmership are transferred. Such machinery includes a money system, banks, bill-brokers and exchange merchants, and a stock exchange, together with various credit devices necessary to the conduct of business. To classify these is to divide them into titles to property and the agents that carry on the transfers. * For a further discussion of speculation see in particular Hadley, Economics, p. 97, and Emery, Americim Economic Association's Publica- tions, February, 1900, p. 103. COMMERCIAL INSTITUTIONS 183 Among the titles by which property is transferred be- tween individuals and corporations throughout the world are gold and silver coin, government paper money, bank- notes, checks, drafts and bills of exchange. These instru- ments must, with the exception of gold and silver, have a basis, for in no instance can the others do more than trans- fer title from one person to another, while the coin has the power of extinguishing debt. Consequently, we may say that money in such forms acts as the settlement basis of commercial obligations. That is, the great mass of credit instruments must have a basis of solvency if it is to act as circulating medium. The presence of a true money in a community furnishes such a basis by granting to the skeptic the option of money or the credit instrument, a choice which materially stimulates the extensive use of credit instru- ments. The fact that a metal serving as a money settles the final balances between individuals of the same indus- trial group, different groups of the same nation, and differ- ent countries of the world, is equivalent to its being used in paying every debt incurred in and between these differ- ent groups and nations. Moving as it does in such settle- ments, the metal money measures the value of every commodity as it passes through the gates of trade and commerce. It must therefore act in the large capacity of a reserve of " commercial obligations." Fundamentally, however, credit itself must rest upon a still wider foundation than that of the reserve used to make final settlements of commercial obligations. The obliga- tions arise and have their existence in the exchange of goods, but only through the possibility of the exchange of goods against goods is the community able to grant present goods for future payment. In other words, its power of payment depends largely upon the possession of capital which is or will be in its hands. Credit thus comes to be the means by which specific forms of goods are changed into a general command over goods. As the greater num- 184 MODERN INDUSTRIALISM ber of transactions are made on a credit basis money plays but a minor part in the great field of commerce, that part being, as already suggested, the reserve against demands for the exchange of goods against money, as in a time of panic, instead of goods against goods as seen in the ordi- nary movement of trade. Outside of government money, banks are the agents through which the titles to property known as notes, checks, drafts and bills of exchange are issued. A definition which includes this conception of a bank is that a bank is an in- stitution which buys and sells titles to capital. Without the bank the titles accompanying every sale and trans- action could not be passed from debtor to creditor, from seller to buyer. " Every exchange of property," to quote the words of another, " is accompanied by two papers : one is given by the seller to the buyer, which is a certificate that the property described in it has passed from the pos- session of the seller to that of the buyer, and is called a bill of sale, which vests the title to the property in the buyer, the other is given by the buyer to the seller, and is a title to an equal amount of the property of the buyer, or some other party, and is called note, draft, check, bank- note, etc., as the case might be." * The transaction be- tween the parties is then completed, but the bank now enters as a factor and makes it possible for the seller to secure the return to which he is entitled. The bank, then, bridges over the gaps in production, which in the modern industrial organization are more numerous and shorter in time than under a less organized regime. It further collects titles to the capital of the community, permitting, in the judg- ment of the managers, the most deserving to use them. The basis of such credits is the goods of the community; the credits which are created by their production are bartered and set off against each other through the agency of the banker. The balances thus created are paid in money. * Walker, J. H., Money, Tra